Exploring the Constructs Financial Capability: Item Response Theory Results

Background/Purposes:

In order to enjoy successful and stable financial life, having a sufficient level of financial knowledge and skills are critical. After the Great recession in 2007, Americans need a higher level of knowledge and skills for enjoying a similar level of financial lives as they did before with sophisticated banking services and constraints.

As such, they are understanding what makes people financially capable and how it is reflected in people's perception is a critical problem. Financial capability, as defined by Sherraden (2013), is to have sufficient information and access to stable and sound mainstream banking services so people can enjoy their financial lives without barriers.

While this study is in line with broader efforts to define financial well-being, this study contributes to the field by building an empirical framework as to measure the financial capability of Americans, and to explore what it is that financial capability matters for whom and why. In other words, this study attempts to put the theoretical concept of financial capability in use in numeric terms by creating financial capability index using Item Response Theory (IRT).

Data & Method

Data and operationalization: This study uses the public use file of the 2017 National Financial Well-Being Survey. The total sample is 6,112, and unidimensional financial capability was constructed using two pillars of financial capability-knowledge and access. For knowledge, self-assessed subjective knowledge and objective financial quiz scores were used. For access, banking status, alternative banking service usage, consumer protection related items were selected.

Measures: This study was conducted using Item Response Theory (IRT) with the R program. IRT is relevant that it shows how people answer each item from which we can assess the patterns, reliability, potential applicability for later use, and relative position of each in terms of their factor score. In this case, A mixed-format unidimensional IRT model was specified to validate the survey. The discrimination and difficulty parameters were then estimated by specifying dichotomous items as 2PL and polytomous items as a graded response model.

Results

The results of discrimination parameters suggest that almost all items have positive slope parameter, indicating as adults have higher financial well-being, it is more probable for them to answer higher option. This shows that the respondents are generally confident in choosing more positive answers that confirm their behaviors as a wise consumer. In terms of difficulty parameters, 99% of participants showed they have a strong trust in banking services. To sum up, the IRT estimate suggests that almost all items have acceptable item information to discriminate the samples.

 

Conclusions and implication

The contribution of this study is to systematically measure financial capability Sherraden (2013)’s financial capability framework. This shows how responses on their objective, subjective knowledge and their availability of the level of access are answered, constructed and composing the latent factor, financial capability. The authors found that it is important to build a building an environment of systematic opportunities with financial knowledge can change the end results of financial status of people.